Seems that in Illinois a noncompete covenant in an employment offer letter is unenforceable if the only consideration given the employee is the promise of continued employment.
A case in Illinois involving an individual who sued his former employer seeking a ruling that his noncompete was unenforceable illustrates a potential pitfall for employers trying to prevent employees from leaving to work for competitors. Employers in many states routinely make offers of employment through offer letters, containing compensation terms, job duties and, sometimes, noncompete restrictions that apply during and after employment. Sometimes – but not always – the noncompete is coupled with a pre-agreed severance payment negotiated at the start of employment that would kick in upon any employment termination.
The case, Fifield v. Premier Dealer Services, Inc., was issued in June 2013 and the report can be found here. The question raised in the Illinois case was whether the absence of such a pre-agreed severance payment made the noncompete unenforceable. The employer argued that the offer of employment itself was adequate consideration in exchange for the employee’s agreement to not work for a competitor. The First District of the Illinois Appellate Court said not so, and the Illinois Supreme Court declined to review the appeal.
Robert Driscoll offers a nice write-up on the case. The case is a bit nuanced, because the court did say that had the employment lasted for an extended period – at least 2 years, as the court put it – the noncompete would have been ok. In this case, however, the employee resigned after only 3 months. As Driscoll puts it, “Employees who work for less than two years for an employer can presumably violate a restrictive covenant without consequence if initial employment was the only consideration for the promise not to compete.”
The case is also interesting because the offer letter accepted by the employee had a clause waiving the noncompete if employment was terminated by the employer without cause during the first year, so clearly there was some recognition by both sides that there are some minimum requirements for the enforceability of noncompetes.
So … Do you have to pay an employee – separately – for a restriction on noncompetition that would apply post-employment?
Several things to take away from this case:
1. Driscoll points out that in Fifield the employer offered nothing in exchange for the noncompete other than the promise of continued employment. He writes that “the Fifield decision does not address other forms of consideration, such as a monetary payment, severance, or a fixed-term of employment, and employers should explore offering one of these to new employees who are asked to sign a restrictive covenant.” So, for example, while employment offer letters typically do not specify a term and employment is terminable at any time, an offer letter committing to a minimum term may pass the smell test. However, what is not clear from the Fifield case is whether that minimum term itself is 2 years. In other words, had Fifield been offered a commitment of employment of at, say, 1 year, would that minimum commitment have been sufficient consideration to make the noncompete enforceable even though the employee resigned after only 3 months? It’s a moot point in Fifield, since there was no up-front commitment at all on a minimum term.
2. An agreement on severance in order to enforce the noncompete would seem to resolve the problem, but what is not clear is whether that agreement itself must be up-front or if instead it can be made at termination. It does not seem practical to negotiate a severance payment at termination especially if – as in Fifield – the employee voluntarily resigns to go to work for a competitor. Who’s going to agree to a noncompete at that point unless given a whole lot of money? And in any event, the court would presumably look to the parties’ agreement at the time of the agreement, not after the fact. At the time of an offer letter without a commitment for severance payment, there is obviously no payment consideration for the employee’s noncompete commitment.
3. Nonetheless, the Illinois court did look to the post-offer letter actions of the parties to determine whether there was consideration for the employee’s noncompete commitment – which in this case was only 3 months of continued employment. The court basically said that, if unspecified-length future employment is the only consideration offered in exchange for an employee’s commitment of noncompetition, then a court cannot determine whether an upfront noncompete commitment is enforceable without looking at how long the employee worked for the employer after making the commitment.
4. This is an Illinois case, and the enforceability of noncompetes varies widely from state to state. Illinois is more demanding than many states about the adequacy of consideration given to an employee. One meaningful distinction in many states – one rejected by the court in Fifield, according to Driscoll – is that between a noncompete covenant signed at or prior to the start of employment and such a covenant signed later by a current employee. But it is really the same question about whether continued employment alone is adequate to support an existing employee’s being asked to sign a noncompete, especially in cases where the employee obviously has little leverage to not go along other than quitting.
Jeffrey Boxer and Emily Milligan write in Inside Counsel that:
In some states — including Colorado, Florida, Georgia and New York — continued employment of an at will employee alone likely will constitute sufficient consideration when an existing employee enters into a new agreement containing restrictive covenants. The rationale is that in an at will employment relationship, the employer has the right to terminate the employee at any time, and the employer’s restraint in exercising that right to terminate and allowing the employee to continue to work is a legal detriment that constitutes consideration sufficient to support a restrictive covenant.
But even in those states that have been more (historically) willing to enforce noncompetes based on the consideration of continued employment, even for an unspecified or potentially short period, Boxer and Milligan still recommend that employers consider leaving less to chance:
… a company seeking to minimize consideration issues can provide an existing employee additional, material consideration directly related to the non-compete. This additional consideration can often come in the form of increased compensation, such as a raise and increased base salary, a signing bonus, or eligibility for annual performance or other bonuses. Consideration for restrictive covenants, however, does not need to be monetary. Additional, non-monetary consideration can include a promotion or new title, access to confidential or trade secret information, additional job training, continued or new access to customer relationships, or (for an at will employee) a fixed term of employment.
The threshold question will always be where – in what state – the employment takes place and what law governs enforcement of the noncompete. But even that doesn’t entirely conclude the analysis, since states like Illinois requiring a minimum length of service by a former employee presumably will still honor a pre-agreed severance payment for a noncompete even where the term of employment was less than 2 years.
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